Growth in Afghanistan

Afghanistan's Recent Economic Performance

Afghanistan’s economy saw record real GDP growth in 2009/10 at 22.5 percent. Since 2002/03 the country has seen average growth rates in the double digits, but with great volatility because of its heavy reliance on agriculture, which is subject to weather fluctuations. Even with an uncertain and deteriorating security situation, strong output was driven by increased donor spending – a 24 percent increase in core budget donor grants and about US$ 4 billion in off-budget donor funding – and recovery from the severe drought of 2008/09. Last year’s harvest led to agriculture output growth of 36 percent (constant 2002/03 prices) and the non-agricultural component of 14 percent.

Private consumption has been the primary driver of economic growth over the past half-decade. Behind consumption growth, is the security economy that generates demand for goods and services, equipment and operations and maintenance of the national army, as well as higher spending by donors, and their large off-budget contributions. In 2009/10, private consumption contributed 22.1 percent points of the 22.5 percent real growth (while net exports represented -5.7 percentage points). Consequently, government spending contributed relatively little to GDP – just 3 percentage points. Furthermore, investment has been dynamic, showing moderate growth over the years and contributing around 4 percentage points to GDP growth, mostly from the external budget capital spending and private investment in the security economy.

Much of private consumption is directed towards services. In 2009/10 and in the past five years, services contributed about half of output (and over 10 percentage points of the 22.5 percent real growth – Figure B). The most dynamic services subsectors have been Communications (45 percent annual growth), Finance & Insurance (27 percent) and Transport (22 percent), with Wholesale and Retail trade lagging at a marginal 4 percent growth. In addition, Agriculture contributed 7.3 percentage points, driven mainly by a good cereal harvest and livestock. The sector’s output has been volatile because Afghanistan’s arable land and most irrigation systems depend on seasonal rain and snow. Furthermore, Industry contracted by 3 percent over last year, due largely to weaker manufacturing, that contracted by 12 percent. In addition, Construction contributed 1.86 percentage points, while mining added only a marginal at 0.11 percent of last year’s GDP growth.

However there are a number of economic indicators suggesting that Afghanistan is on an unsustainable growth path. The country is highly aid dependent with foreign aid disbursements of 47 percent of GDP in 2008/09. Only little is produced for export purposes while the country depends heavily on imports for reconstruction and food. The same financial year, private investment only reached 8 percent of GDP, while total investment was 32 percent of GDP. Another major concern is the fact that gross revenues from opium trade are estimated to be equivalent to as much as third of measured GDP (opium is not reflected in the official GDP numbers). Afghanistan is the source of 93 percent of the world’s opium production and the area under cultivation more than doubled from 2003 to 2007. This context implies the need for a medium term strategy based on alternative sources of sustained growth in Afghanistan.

Great hope is being placed on the development of the mining sector. At present, the mining sector’s contribution to GDP is marginal, at less than 0.3 percent. Two decades of war, chronic neglect, and severe under-funding have limited the development of this sector. But two recent large scale investments at Aynak and Hajigak could mark a fundamental shift. It is estimated that Afghanistan has substantial, untapped mineral deposits which have the potential to make it to a major exporter of minerals. While there are many uncertainties about the actual benefits that would accrue to the country from mining, there is little doubt that the sector, if managed well, could be the main driver of growth in the years to come.

However, the development of the mineral sector risks of further burdening the country’s fragile governance. Moreover, mining is pre-dominantly a capital-intensive activity which will only generate a limited number of jobs. Unless linkages to other economic sectors are strengthened, mining development is unlikely to bring relief to the poor and vulnerable population in Afghanistan.

Ongoing analytical work at the World Bank:

In an attempt to better understand constraints and drivers of growth, the World Bank is currently preparing two analytical reports addressing the challenges the Government and development partners will face in the medium and long term. The report Sustainability of State Building in Afghanistan will look at the current degree of fiscal and capacity reliance of the state on external resources. It will use scenario planning to gain a better understanding of fiscal and institutional sustainability over the next 10 years with view to better understanding the implications of aid flows on service delivery.

The report Economic Growth in Afghanistan will explore the long term drivers of growth in the absence of the market distortions resulting from the security situation. It will deal with the question of how Afghanistan can foster private sector development, agriculture and rural development, as well as ensure that emerging mineral wealth translates into a source of sustainable and inclusive growth.

Last updated: February 2011




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